Brazil Exchange Rate

Brazil: Brazilian real rises despite new FX measures

July 29, 2011

On 29 July, the Brazilian real (BRL) traded at 1.56 per USD, which only represented a minute gain of 0.3% compared with the previous month's position. On a year-on-year basis, nominal appreciation of the real was 12.9% versus the USD. As a result, BRL is currently trading at levels not seen since the currency crisis of 1999, which severely hit the Brazilian economy. The continuous appreciation of the real stems from substantial interest rate differentials, which attract large capital flows from advanced economies where nominal interest rates continue to remain low. Strong BRL hurts domestic production and exporters, which face a tough competition with cheaper imports from abroad. In order to curb the appreciation of the BRL, several measures were already implemented by policymakers since early 2011 including raising the so-called financial operations tax (IOF, Imposto sobre Operac?es Financeiras). On 8 July, the Brazilian Central Bank (BCB) set a reserve requirement of 60% on short U.S. dollar positions that are over USD 1.0 billion. The similar measure had previously been introduced in January, however, at the time the ceiling was set at USD 3.0 billion. The current move is to further reduce the banks' exposure to bets against the U.S. dollar. More recently, on 27 July additional FX measures were introduced to prevent the Brazilian real from appreciating further. From now on, the government will charge a 1 percent tax on derivatives transactions (net short USD forwards and futures) in the foreign exchange market. Moreover, the law was adjusted to allow the tax rate to be lifted to 25%, should the need arise. In addition, the government warned that further measures could be implemented such as raising minimum trading margins. All the new FX measures aim to reduce the liquidity in the spot market as well as to create disincentives for investors by imposing higher transaction costs.

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Brazil Economic News

In December, economic activity rose 1.4% from the previous month in seasonally-adjusted terms, according to the Central Bank’s monthly indicator for economic activity (IBC-Br, Indice de Atividade Economica do Banco Central).

Retail sales (excluding cars and construction) fell 1.5% from the previous month in seasonally-adjusted terms in December, which contrasted November’s revised 1.0% increase (previously reported: +0.7% month-on-month).
Declines were seen nearly across the board, with only two of the eight components of the index seen growth in sales.